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I respectfully disagree with a key point of John Burns argument.
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Hayinhere
Posted 11/25/2012 23:26 (#2717367 - in reply to #2715569)
Subject: RE: Much to learn young paduain.


Central NE

1.   The chinese say "trees don't grow to the sky".   Or what seems like will go on forever will in fact stop at some point.   You seem to have this same feeling with regard to commodities and gold.   What you need to realize is that infinity can go both ways - infinitely large and infinitely small.   Things go on to infinity all the time and we think of it as approaching ZERO.

Stop thinking of the price of commodities and gold as a value of goods, and instead think of it as a value of money priced in commodities.   Flip your charts upside down and it will show you which infinity the dollar is heading to.  You bring up history as if you think it reinforces your point,  while I see history full of examples of why our paper dollars will approach the infinitely small value of ZERO.

You said in an earlier post:

They have many tools and they may contract their expansionary money supply somewhere else.. they are not going to just flood the economy with printed $$$ and watch the value of the dollar crumble.. at least I would not think this to be the case.. their going to adjust course as time moves along.. and maybe we've crossed a critical tipping point..??

(edit add:) From the Reuters article..
"Buying bonds expands the Fed's balance sheet. While the central bank says it will be able to shrink its giant balance sheet -- $2.85 trillion before its latest round of buying bonds begins on Friday -- without sparking inflation, it has never done anything like it before. Critics also say bond-buying enables Congress and the president to avoid dealing with looming fiscal problems by giving them a handy buyer for the nation's ever-increasing debt.


The dollar has already lost 97% of it's value since the Fed took over.   Do you think they will not let it lose another 2 or 2.5%????   It can't drop more than 2.9999999999999999% more because of it's inherent imbedded value of paper as a toiletry.
Gold at 2000 would translate to a 99% loss of value.   a 99.9% loss would traslate to $20,000 gold and 99.99% - $200,000 gold.  What makes you think the last .9% is so special they will stop one hundred years of madness.   As the article you quoted said - "While the central bank says it will be able to shrink its giant balance sheet it has never done anything like it before."

2.  You and the writers at slate are mixing up Inflation and Consumer Prices.  They are not the same thing.
Learn this:   Inflation is the expansion of the monitary supply.  
                     Consumer Price Index as it now stands cannot measure the effects of inflation.
                     The money supply is not only the assets of the Fed, but the entire Debt of the Public and Private sectors.
                    
From the slate article:
Money supply is rising fast, so where is the inflation? U.S. consumer prices rose 0.4 percent in February, but that was mostly gasoline. Year-on-year, inflation is above the Fed’s 2 percent target but not by much. Yet money supply is going through the roof. Either inflation is on the way, or Milton Friedman should lose his Nobel prize.

Friedman argued that “inflation is always and everywhere a monetary phenomenon.”


The effect that QE3 will have on prices is to keep them from collapse.  Since QE3 is contained in the MBS markets, the purchases have the effect of preventing a debt deflation spiral.   The price effect from the inflation happened ten years ago.  There is a shift of debt held by homeowners and banks to the balance sheet of the Fed, the effect being that neither the home borrower who defaults or the Bank who lent will lose money, but rather everyone who has money saved in a dollar denominated account will loose purchasing power. 

As you point out, as debt is paid off the Fed could theoretically unwind these transactions. But one must have fewer expenses than income to pay off debt and neither the underwater homeowners or the U.S. Government is in that position.   For now, the effect is the same as a bank renewing the operating note of a bankrupt farmer.

3.  Interest rates do not have to remain low for real interest rates  to stay negative.
     & Inflation can increase "costs" while products get cheaper.

 However this point made in a post below.. a key point.. is wrong. 
either real interest rates stay negative or the US and Fed together blow up their balance sheets


- Remember that Inflation is an expansion of the monitary supply, and that QE3 might not in fact be increasing the monitary supply, but simply changing the names of the debt holders whereas monitization of new government debt of which the Fed purchased 69% of in the past year is in fact an inflationary event that robs value from those holding U.S. dollars.   

- As productivity increases, the cost to produce goods should fall.  If everyone  produces 10x more than they did  before, prices should drop accordingly.   If the Fed loans money into existence at the same time, the inflation swallows the productivity benifits.  Instead of prices dropping to 1/10th of their former price, they may only drop in half for example.

- If prices are not already set to fall due to productivity increases, and prices are not already set to collapse due to a monitary induced debt bubble, then you may see rising prices as an effect of inflation.   The damage done to the economy from all three effects of inflation is the same.

I have to cut this short as I have to go-  I hope you think about these points.

I just wanted to add that  I agree with your conclusions about debt and land.



Edited by Hayinhere 11/25/2012 23:39
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